EQUITY OWNERSHIP IN DEVELOPMENT COMPANIES:
A VEHICLE FOR INSTITUTIONAL INVESTMENT IN REAL ESTATE.
by
Paul Anthony Heiss
Bachelor of Science in Architecture
Arizona State University
1985
SUBMITTED TO THE
IN PARTIAL FULFILLMENT
MASTER OF SCIENCE IN
MASSACHUSETTS
DEPARTMENT OF ARCHITECTURE
OF THE REQUIREMENTS OF THE DEGREE
REAL ESTATE DEVELOPMENT AT THE
INSTITUTE OF TECHNOLOGY
SEPTEMBER, 1990
(c) Paul Anthony Heiss 1990
The Author hereby grants to M.I.T.
permission to reproduce and distribute publicly copies
of this thesis document in whole or in part.
Signature of the author_
Payl Anthony Heiss
Departmenr of Architecture
September 1990
Certified by
Marc Louargand
Lecturer in Urban Studies and Planning
Thesis Supervisor
Accepted by
Gioria Schuck
Chairperson
Interdepartmental Degree Program
in Real Estate Development
MASSACHUSETTS INSTITUTE
OF TECHNO! GY
SEP 19 1990
LIBRARIES
1
Rotch
EQUITY OWNERSHIP IN DEVELOPMENT COMPANIES:
A VEHICLE FOR INSTITUTIONAL INVESTMENT IN REAL ESTATE.
by
Paul Anthony Heiss
Submitted to the Center for Real Estate Development
on September 1, 1990 in partial fulfillment of the
requirements for the degree of
Master of Science
in
Real Estate Development
ABSTRACT
This thesis explores and supports the increasing
institutional financing of, and equity investment in,
the operating businesses of real estate developers.
Increased illiquidity and regulation of traditional
real estate capital markets have forced developers to
seek interim operating and construction funds for new
examines the opportunities,
business.
This thesis
risks and returns on the portfolios of institutions who
fund or acquire established development companies in
property
specific,
traditional,
to
relation
acquisitions.
developer
established
in
an
The
investment
requires the valuation of assets beyond the existing
portfolio to include: operating futures, management
skills, and corporate reputation. Finally, the thesis
model for developer oriented,
creates a valuation
localized
in
based
investments
relationship
entrepreneurial real estate organizations.
Thesis Supervisor: Marc Louargand
Title: Lecturer in Urban Studies and Planning
TABLE OF CONTENTS
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p.
4
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p.
5
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p. 8
3. THE DEVELOPER INVESTMENT SCENARIOS .
.
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p.24
4. THE ADVANTAGES OF EQUITY OWNERSHIP .
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.
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p.34
5. THE VALUE OF EQUITY OWNERSHIP .
.
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.
p.44
6. THE CANDIDATES FOR EQUITY OWNERSHIP.
.
.
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p.55
ACKNOWLEDGEMENTS
1.
INTRODUCTION
.
2. THE REAL ESTATE MARKETPLACE
7.
CONCLUSIONS.
.
.
Notes
.
.
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.
.
Bibliography
.
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.
p.63
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p.65
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p.71
ACKNOWLEDGEMENTS
This
paper
To my
confidence
is dedicated:
parents, Bob
has
never
and Noreen.
wavered.
Their
They
support and
encouraged
my
goals and showed me the way through their own success.
To Cordell,
for the
the healthy competition.
inspiration, the
insight, and
Who's better in powder anyway?
And especially to Angelina,
and patience continues to amaze.
who's love and strength
CHAPTER 1
INTRODUCTION
This thesis explores and supports the argument for
investors to
institutional
augment
estate
their real
portfolio allocation needs through equity investments in
financing
structures
portfolio
returns
may
with
allow
than
term
traditional,
Ownership and control of
real estate
of
production
long
increased
lower risk
property specific investments.
the
ownership and
Corporate equity
development companies.
offer
may
additional
access to premium assets and market knowledge.
private
and
Public
companies and
fiduciary
or
that
showed
real
Consequently,
added real estate to
the
late 1960's
capital
dependent
estate
could
institutional money
Each real
early 1970's.
and
actually a
successful
residential tenants.
estate
their
as
an
be
an
managers
their investment portfolios during
investment was
on
real
of
institution's stock and bond
attractive addition to the
holdings.
management
Early research into returns and
acceptable asset class.
volatility
toward
gravitated
investments
insurance
with reasonable
private trusts concerned
returns
portfolio
funds,
pension
leasing
In the
estate
business investment
to
commercial
and
aggregate, the real estate
industry is composed of (a) real assets ; (b) public and
private
and
firms that
development
offer investment,
m anagement
services;
asset, property,
(c)
and
the
service firms
the
real
The
investment
capital.
have not as
yet been a critical
of
providers
Institutional real
investment.
estate
estate
part of
investors
focused on real assets and property specific investments
to
fulfill
portfolio
estate
real
their
allocation
demands.
forays into
Preliminary
the world
estate
of real
investment consisted primarily of debt financing on real
assets
with
a
High quality,
loans.
well
of
level
qualities
of
both
and
and
industrial
estate
equity
investments were often backed
commercial
properties
managers
structures
financial
debt
mortgage
knowledge and
As the
real
institutional
complicated
increased,
simple
on
located trophy
choice.
investments of
were the
skill
guaranteed return
emerged.
with
These
by second tier, suburban,
During
properties.
this
period of investment evolution and growth, institutional
success with the real
investors experienced substantial
estate allocation of their overall portfolios.
That success, however, may be increasingly difficult
to duplicate on a long
the
real
space
Record
environment
estate
explosive growth
of both
inventory in
numbers
term, risk adjusted basis during
of
the
real
of
1990's.
the
real estate values
United States
estate
and floor
ended in
company
The
1989.
bankruptcies
followed a plunge in the capital market's willingness to
finance the operation and construction of real estate.
potential may still
Nevertheless, strong investment
be
to
available,
extend
real
institutional investors
estate
investment
Ownership, funding,
production.
caliber development companies
demands
for
high
sustained
into
the
and
willing
to
means
of
control of
high
may satisfy institutional
returns
with
low
risk.
Difficulties in the real estate industry may necessitate
the
long term
sustain
the
financing
production
of
development companies
of quality
demarcation between investor and
dissolve.
To
further
this
investments.
to
The
seller may continue to
trend,
institutional
investors should explore equity ownership in development
companies as a vehicle
estate.
for continued investment in real
CHAPTER 2
THE REAL ESTATE MARKETPLACE
THE INSTITUTIONAL ENVIRONMENT
its
from
Real
inception.
the
in
early
investment
estate
by
and fiduciary institutions)
institutions (pension funds
began
estate
real
evolved tremendously
class has
an asset
investment as
of
acceptability
fiduciary
The
Previous
1970's.
pension
fund
sponsors worried about the legality and acceptability of
during until the early 1980's.
investing in real estate
As
fiduciary investor's
has grown accordingly.
acceptability of real estate
comparison,
evolved to
real
estate
In
with, and
The augmentation
direct
portfolios with
the
investment
equity
allow investments
fund managers.
in, experienced mutual
of
and
bond
responsible
strategies has
has increased,
knowledge
ownership
of
eminent developers may follow this same evolution.
Portfolio
managers first
equity investment
trusts,
direct
structures.
commingled funds,
investments.
thoroughly satisfied
During
searched
the
Yet
Investors
and finally
institutions have
not
been
investment structures.
investors
method of
debt and
then financed
joint ventures,
with their
evolution,
for better
real estate.
explored simple
have
continuously
placing their
money in
pension funds
contributions to
By 1990,
grew over
During this time, the average of
100% from 1985 levels.
investment funds for real estate also increased to a 10%
The
percentage.
allocation
demand for
implicit
real
estate grew from this 10% to over $268 billion by 1988.2
Implicit Demand for Real Estate
@ 10%
From Growth in Portfolios
$ billions
300
250
2
00
............
100
150
-
...............
.......
...............
I..
.....
................................................
-
..
.........
. ........
......
. ......
.........
....
1......
1-
1.
.
. .
.... ....
50
0
1979
1981
1980
1982
1983
1984
chased
fewer
Russell-NCREIF
1988
investments
"large amounts
returns as
quality
1987
spurred
growth
increasingly lower
1986
M Annual Increment
Real Estate Demand
fund's
The
1985
The
projects.,3
index tract
estate returns over the past decade. 4
REAL ESTATE TRENDS
RETURNS 1978-1988
25
20
----
15 -
- --
1978
1979
1980
1981
1982
1983
-
-
1984
1985
YEAR
Russel-NCREIF Index 1988
ALL PROPERTY TYPES
--
1986
of money
respected
in total
the decline
1987
1988
at
real
The
in
showed declines
also
index
returns
1990
divided by property type. 5
RETURNS BY PROPERTY TYPE
1989
14
5
3
1
HOLDING PERIOD (YEARS)
SOFFICE
Russell-NCREIF
INDEX
I~li RE TALl
EEE
R&D/OFFICE
E
WAREHOUSE
1990
For the first time in its inception in 1978, real estate
returns of the Russell-NCREIF Index (6%) were lower than
T-Bill
the benchmark U.S.
estate
returns came
structures
of
(8.2%).6 The decline in real
through
institutional
many different
real
estate
They included:
INSTITUTIONAL REAL ESTATE
INVESTMENT EVOLUTION
DEBT
EQUITY
REITS
COMMINGLED FUNDS
JOINT VENTURES
DIRECT INVESTMENT
financial
investment.
DEBT
debt financing
Traditional
has been
an acceptable
financial structure from the inception of fiduciary real
estate
investing.
Institutions
successful, property
and future
and avoided
valuation risk.
for
quantifiable
Development and
invested in
the
development, leasing,
The portfolio
life
existing,
of
returns were
the
investment.
construction loans were secured
by the
property and personal guarantees from the principals.
of strong growth in
During periods
the late 1970's
and early 1980's, many developers followed the "Wild cat
approach
to
"spec, spec"
with
estate development."
real
The
preferred
development projects financed at high risk
from the
minimal equity
The
company.
buildings
were often started without any sales or leases in place.
their
found, however,
lenders
Institutional
debt
margins and returns to be too low for their risk levels.
An
experienced
estate
entrepreneur finds
required to
mortgage
get a
past; the rates
lenders.
Straight
that
no longer
willing to
are higher and the ratios
They want
fallen
more, often
equity return." 9
11
out
real
is
the traditional
favorable terms that they
debt has
the
substantial equity
Most simply,
loan.
lenders are
available on the
lower.
commented, "Today
developer
make money
have in the
of loans are
of favor
participation in
with
the
EQUITY
Lenders realized that their real estate debt returns
leveraged equity
convertible
and
mortgages
in
their real
to
estate.
often without
lend searched,
willing to
including
participations
equity
appreciation increases
Investors not
Institutional
structures
hybrid
developed
lenders
equity.
and
in real
accentuated the
early 1980's
debt
between
discrepancy
substantial rise
A
returns.
during the
estate values
capture
the developer's
lackluster when compared to
were often
success, for quality equity.
projects with
successful
to
sell
unrealized appreciation
. An
problem, "A
year
did
developers
Understandably,
investor lamented
institutional
not like
the
ago, a developer would hardly deign to talk to you about
selling
a
future
projected
quality
The
a price
at
building
capitalized
rents
equity may
around
to what
getting close
auction.
profitable
conversion
This
sell
he could
should
unwarranted." 1 1
euphoria
Clearly, asset
attractive over the near term.
at
at
%."10
8
a price
But
that
now
is
a foreclosure
easier
and
more
developer's
because "the
to
than
expensive.
developer is
get for
for
allow
equity investment
from
same
"That
trying to
less
was
become less
eventually
investor continued,
hustling
that
is
probably
based equity
should be
gloom
REAL ESTATE INVESTMENT TRUSTS
one form
As
Real
Estate Investment
the mid
during
correlated
in equity
of investment
(REITS) became
Trusts
REIT
1970's.
returns were
equity
unleveraged
with
lesser degree, correlated with
equity real estate returns
popular
negatively
estate
real
and, to a
correlated with common stock
returns, highly
A broad index of
bonds.
does little statistically to
REITs underperformed
share performance.12
explain REIT
real estate,
the Frank Russell Company Index (FRC)
and the S & P 500
Index over their 15 year lifespan. 1 3
REIT returns improved somewhat during the late
The
1980's.
their
investment
estate
of
substance
flow
cash
movement
returns and
lackluster
have
equities
from
pools.
with publicly
further
discouraged
real
However,
detached
asset
underlying
the
has
their interest in
income. 14
felt
managers
1986
in
tax incentives
in REITs because of
renewed interest
maximizing
of
repeal
the
REIT's
traded
institutional
investment.
COMMINGLED FUNDS
A
further
structures was
funds.
who
extension
real
developed through
The funds were
provided
of
real
with
staffs.
An industry
investment
commingled investment
sponsored by a fiduciary advisor
estate
small amounts
invested
estate
expertise.
of
money
critic 15 commented
Institutions
or with
in 1982
small
that
"The introduction of the pooled fund arrangement in 1970
enabled
pension funds
without
having to
into real
diversify
to
become
real
estate
The
estate "experts."
commingled fund arrangement have enabled both industries
to
without either
meet
"expert"
in
however,
these
other's affairs.
the
now
pooled
with a greater feeling of
appreciation of
as
a sort
relatively
of
importantly,
offer
arrangements
There has not been
security.
responsibilities
the financial
investors and advisors.
and investment criteria of
names of these
fund
More
an
of entering real estate investments
pension funds a way
a real
to become
having
parties
The
substantial financial institutions stand
protection from
"new"
investment
the
arena
vicissitudes of
many
for
a
pension
funds."
As the performance of fund managers and the skills of
investment
improved,
managers
understanding has dramatically
However, some
improved.
knowledgeable institutions desired
and
communication
greater contact with
the properties.
Most wanted to optimize their portfolio
diversification
through
many
real
estate
discretionary
fund
accounts
property
investors
with
types.
Eventually,
gravitated
commingled
toward
advisors
to
increase control over their investments.
JOINT VENTURES
To further increase investment control, institutions
also
entered joint
advisory companies
advocated
joint
ventures.
Aggressive
such as Copley Real
ventures
with
pension fund
Estate Advisors
strong
regional
Progressive advisors and sophisticated fund
developers.
developer's strategic position and
gained access to the
returns. 1 6
high
promising
and increased
Copley
investor.
investments
based
relationship
these
believed
and
developer
promoted
structure
financial
The
between
cooperation
thereby
institutions
The
successful.
when
repeated
were established and
Relationships
promising projects.
on
developers
with reputable
forces
joined
managers
were
commingled funds
returns over
with similar or lessened risk.
DIRECT INVESTMENT
The next step in the evolution of real estate
investment, without developers or
investment was direct
as
investors
have been
developers.
from
are
no U.S.
development
real
estate
projects.
the
But
on in the
1980's brought
The decade of the
people
locating
departments
often
fund
pension
into
1990, many institutions
departments
These
7
to become involved early
sophisticated
By
accounts."1
"A trend
development process.
management."
staffs doing
was swift.
investor types
developed for funds
"more
own
their
work for
transformation of
my knowledge, there
with in-house
pension funds
fund
one pension
as 1978,
late
"To the best of
advisor commented,
legally distinct
conceptually and
As
evolution,
the
Throughout
partners.
advisors
and
had separate
investing
surpassed
in
local
developers in their own markets.
Progressive fund sponsors realized that, "A pension
15
offer
advisor
concurred,
"A pension
be
able to
a
or
investment
would
make more money
portfolio
a similar
than
its holdings
on
9
an
Others
its own
proceeded on
pooled
returns than
higher
obtain
run by
fund."
commingled
fund that
estate
real
in-house
own
right, the plan will
If done
program.
its
up
set
should
commingled funds
better return than
wants a
plan that
equity funds after administrative expenses are paid." 2 0
Some pension funds invested
directly because it was
"more economical to hire their own internal people.
The
returns.
expertise
funds
anyway." 2 2
fund to
in a pension
kept lean
staffs were
then
The
ended
outside
show good
hiring
up
But
external
firm's
advisory
management and acquisition fees were quite high.
As
invest
directly,
the
very competitive for good
projects.
One
funds
pension
market became
began to
bid against one another for
point
that the
commingled funds
noted, "private and
industry observer
the best investments to the
highest quality
projects returns
were
below the risks associated with real estate."21
There was no consensus
Some
felt
maintaining
of
the cost
among pension fund managers.
a highly
skilled
investment management staff was significant and ought to
be included in evaluating
real estate investment
is
uncertain that
access to
the expected returns of these
opportunities.23 Furthermore, it
in-house development
the strategic
advantages of
entrepreneurs and building type experts.
personnel have
community based
ADVISORS
They were
estate investment.
retained for a variety of
Advisory personnel
transactions.
sold
and
experience
finance
institutional real
satisfy the increase in
advisors to
fiduciary
up as
firms sprang
estate service
Real
or
real estate
had
and
services
their
investments to individual or combined real estate funds.
"The trustees'
estate fund manager commented,
One real
possibly perverse
shield themselves from the
desire to
consequences of real estate investing is one of the main
talked with
the
to accept
refuses
funds
joint
about possible
that the
know
any deal
inevitably kills
deal.
pension
and financing
ventures
promise
They
exist.
Developers and other real estate people who
protection.
have
firms
advisory
these
reasons
is that the
responsibility
that
one thing
pension officer
for making
the
They want a fiduciary to approve it." 2 4
Advisory firms provided
These firms acted as
double check.
ran
Advisors
management
as
well
as
strategists,
daily
the
tasks
and
recommended
investors,
They had
or screened
fee.
a
for
property
and
important
developers.
projects
strong leverage
-
investment
same
the
brokers, managers,
councilors
provided
sophisticated real estate
often
services beyond a fiduciary
access
to
But the advisors
project
to
different
from certain
because "there
was a
buyers.
lot of
money chasing a few high quality properties."25
Simultaneously,
the advisors
taught their
clients
the
of
fine points
manager's
level
skill
increased
making on
each
pension
fund
Eventually, the
investment.
successive
deal
real estate
them
prompted
to
question their advisor's recommendations.
Each
different
investment vehicles
of the
risk
and
return targets
varying aversions to risk.
was selected
No single structure met the
As such, the
pension fund's portfolio allocation needs.
has been driven by the
evolution of investment vehicles
of
shortcomings
estate
institutional
real
valuable skill
and knowledge.
investors
pursue
ever
more
thereby encroaching into the
investor
As
general,
In
designs.
previous
with
managers
by
for
the
developed
has
knowledge increases,
complicated
structures,
developer's arena.
As the
growth of the 1980's subsides, institutions will be hard
pressed to
find high quality, successful,
real estate.
The competition for real estate will increase.
THE REAL ESTATE ENVIRONMENT
The business of real
a moderate pace during
grew at
of
newly
created space
Effective
estate
estate development and finance
rents
and
was
were
products with
estate funds
structures.
strong
sale prices
investment capital
developers
the 1980's.
also
in most
increased
was plentiful.
plentiful
and
homogeneous returns.
generally pursued
A
few
increasing
appetite
development
deals.
and
real
Real estate
offered
diverse
Institutional real
investors
equity
had
of
the
an
and
participation
the end
However,
markets.
conservative investment
aggressive
for
Absorption
decade
foreshadowed a different real estate environment.
The development business had radically deteriorated. 2 6
"Nothing is more humbling to a developer of the
1980's than to be a developer in the 1990's.
1990 began with most
of
in
categories
all property
rates increased
regional United States markets
over supply.
levels in all
to record
Vacancy
major office,
residential sectors. 2 7 real
commercial, industrial, and
estate developers were not optimistic about their future
business.
REAL ESTATE 1990
COMPARED WITH 1989
BEAR MARKET FOR FIRM
65
BULL MARKET FOR FIR
BEAR MARKET/INDUSTRY
22
19
The
overbuilt markets
put
values
of
sale
capitalized
recessionary
Additional
critical
the
on
pressure
equity.
estate
real
and
on rents
pressure
(S.I.C.) of Fire, Insurance,
Standard Industry Category
and Real
Estate lessened those industry's
needs.
The
of
consolidation
office space
sector
service
the
increased leasing concessions and lowered releasing face
rents, further decreasing existing asset values. 2 8
CAPITAL MARKETS
capital
space was
demand for
The
in the
regulatory control
Increased
markets.
by tightened
not helped
commercial banking industries over
savings and loan and
the deregulated environment of the 1980's precipitated a
In July of 1990, the Galbreath
national credit squeeze.
Company, a prominent national developer, reflected, "The
savings and
banks and
market"
are
We
looking
As
of
new
heightened
the
Galbreath continued,
"We
there
a result,
to
sources of
overseas investors and other
pension funds,
of the
basically out
loans.
construction
for
financing.
loans are
a lot
isn't
building." 29
The
tightened
lending environment
need
for developer
equity.
have
one
suburban
project
situation.
lenders
The
still
demands have
the company
thrust has
a
that's
build
tenants are already lined
from
want equity
hasn't started
building yet.
build where we
20
up.
That and
agreement on
prevented an
been to
us.
to
suit
But the
other
financing, and
Our primary
have equity
in the
project.
But with situations more difficult to finance,
the company will do more contract building." 3 0
The
capital
additional
for
demand
policy.
The Tax
environment
an
came during
Reform Act
and
equity
of 1986
operating
of difficult
tax
removed the
tax
shelter impetus to help raise real estate equity through
Equity
reform.31
raised
capital
of
summary, "Two
In
to tax
major sources
the
syndicators.
banks and the
up, the
capital dried
syndications
through
the level raised prior
one tenth of
dropped to
base
capital
equity
investment because of lowered
available for real estate
yields.
the
eroded
This
syndications.
of
The
capital markets were moving in unsettling directions." 3 2
LIQUIDITY
The
operating
problems for
developers.
with high leverage.
Development
and operated
equity in each
projects.
projects
covered
architectural and
small
Consequently,
caused severe liquidity
organizations.
Cash flow from
overhead,
corporate
legal expenses
cash
flow
for new
shortfalls
problems for thinly capitalized
A developer commented,
business.
"We used to say,
But those days are over in
'The more debt the better.',
the development
the company
project, providing
large returns through positive leverage.
feasibility,
firms
Most aggressive developers had only
their own
completed
severe
caused
markets
owned property
traditionally
10-15% of
capital
turbulent
Now 'Equity will
need equity to ride out the tough times." 3 3
21
rule.' You
the
developed in
periods, a herd mentality
During down
entrepreneurial real
avoid
To
community.
estate
looking bad, the image conscious developers waited until
the
onset of
This
competitors.
assets
trouble to
financial
signaling
feared
to
periods
during growth
and
creditors
sales
often impeded
mentality
They
their property.
to sell
problems
generate cash
of
flow.
When sales could no longer be delayed, a wave of sellers
when the
development community
crisis.
By 1990,
estate
market
has,
or
at
at least two
real
appears
to
have,
Second, very few deals are being made." 3 5
stagnated.
real estate community could do
There was little the
to
least
beyond
First, the
to panic.
flight
for their
reasons
was hurtling
into panic." 3 4 "There were
depression and
cash flow
reacted to a
pendulum
"The
were interested
Few buyers
the market.
often swamped
disconcerting
the
change
investors alike
have been a
of a pension's
short lived moment in terms
Ironically,
who
"Those
and
of 1990 may
realized the credit crunch
life.36
portfolio
Developers
aura.
understood
potential long term values were either unable to finance
acquisitions or waited for prices to bottom." 3 7
Long time industry
sense
business
Living
the
doom,
of
is never
in the
your summer
analysts commented, "Despite the
truth is
as good
real estate
vacation in
Yesterday, nothing
or
that
the
as bad
community is
a ward for
as people
estate
say.
like spending
manic depressives,
could go wrong; and,
22
real
today, nothing
There's no middle ground." 3 8
can go right.
Surprisingly, some developers did not have liquidity
problems.
Realty
Large
of
is very
"JMB
to
continued
Chicago
marketplace.
like
developers
JMB
Institutional
thrive
in
the
one institutional investment partner said,
in a
very
The company's continued health
in a
well capitalized
solid position."39
and remains
estate environment is due
turbulent real
to its access to
in large part
institutional funds, which reduces its
dependence on short term borrowed funds. 4 0
The real estate marketplace of 1990 is difficult for
institutions
and developers
alike.
Both
parties have
crisis they urgently want to solve.
Institutions have money to invest in real estate and
they have
grown familiar
investments are scarce.
with developers,
desire premium assets and
They
recognize they need talented
yet quality
management to find and run
them.
Developers want to survive.
liquidity problems have forced
place in the industry.
and their expertise.
Severe overbuilding and
many to reconsider their
They need to sell their property
They need to sell to institutions.
23
CHAPTER 3
THE DEVELOPER INVESTMENT SCENARIOS
THE SOLUTION
developers.
managers and
both portfolio
needs of
estate
a practical solution for
development companies provides
the
real
in
investment
equity
Institutional
Developers get operating capital to see them through the
difficult
development climate
Portfolios
projects.
and to
future
estate
class
real
secure
Yet, institutions
the highest caliber.
investments of
plan for
may be reluctant to acquire these means of production in
the
industry.
real estate
investor
alike
creating
the
should
the
outweigh
investments
to
of
institutional
may allow the
the depressed market era
of
owner and
difficulties
Strong
relationship.
leverage during
structuring
benefits to
The
investor's
dampen
historical concerns.
vehicles for equity
Three distinct
and equity-like
Investments
investments are available to pension funds.
include publicly traded stock, privately held equity and
hybrid
equity or
structure has
various
Each financial
corporate financing.
a number
of related
substructures.
The
suitable
for
have characteristics
structures
strategic, investment and development needs.
PUBLIC EQUITY
Real Estate Companies
Substantial Holdings
REITS
e
PRIVATE EQUITY
Real Estate Companies
Income Property
Direct Investment
e
HYBRID EQUITY
Loan on Portfolio
Loan on Cash Flow
Preferred Stock
(A) PUBLICLY TRADED EQUITY
equity contains publicly traded
A major category of
holdings that
and
analysis
The
control
comes
only
real estate
Stock
equity
acquisition.
public equity
to any
the
of
traditional
through
acquisition
is similar
markets
exchange.
a major stock
trade on
estate
substantial real
with
and companies
companies
development
includes
stock
held
Publicly
stock.
through
control of the majority of shares outstanding or through
enough stock to obtain influential seats on the board of
acquisitions
These
directors.
be
may
realized
by
solicited or unsolicited stock offers at or above market
price.
directly from
stock may be
of public
Purchase
the company or through brokerage houses.
DEVELOPMENT COMPANIES
The first
type of
companies
with
publicly
of these,
substantial size.
few pure real
There are only a
development companies.
estate
equity contains
publicly traded
residential construction
stock
traded
of
specialize in
many firms
or building materials
and may
be unfamiliar to the institutional real estate investor.
A number
of
hotel
development divisions
account.
examples
operating companies
to supply
have
product for
in-house
their own
Perini Investment Properties is one of the few
with
commercial,
expertise. 41
25
hotel,
and
residential
SUBSTANTIAL REAL ESTATE
The second
Companies with
for
divisions
or in
utilities
such as
transportation
Large
utilities, mining,
railroads, power
users
have
may
agriculture
and
development
miscellaneous holdings.
their
Large office
holdings.
their
either
for
investment
equity
be attractive
holdings may
real estate
holdings.
estate
real
substantial
with
corporations
equity includes
type of publicly traded
promising
vast supplies
have
of
owner occupied space.
Other corporations may recognize
value in their office
buildings or industrial factories
as redevelopment opportunities.
In
fact,
institutional holdings
company
real
corporate
in comparison.
real estate
with substantial
holdings
dwarf
An example
is the
of a
Sante Fe
pension fund commented, "The
A large
Pacific Railroad.
estate
California Public Employees Retirement Systems' purchase
of a 20
percent stake in Sante Fe
on Dec.
29,(1989) closed a
year that saw pension funds
taking larger and more unusual
the pension fund
It
targets.
estate allocation
Pacific Realty Corp.
deals to meet their real
is the first
has asked for, and
time that
received, seats on
the board of directors." 4 2
received by the real estate
The investment was well
community.
"It's
one of
the most
creative investment
deals a pension fund has ever been involved with," noted
William
Ramseyer,
executive
Institutional Realty Corp.
vice president
with
JMB
CalPERS has purchased common
26
is now considering taking the
stock, at a discount, and
private." 4 3
developer
investments
to explore
opportunity
significant
was
Clearly, there
in corporate
real
for public
real
estate holdings.
REITS
A
third, and
estate
are
holdings
REITs that
(REITs).
acquired
for
development
Real
intentions have
trust offering.
Trusts
major exchanges
may be
or
hold
REIT
Most
Investment
Estate
trade on
term
long
reorganized.
structure
familiar
private
taken
and
portfolio
holdings
and
been well
defined in
the
REITs have specialized in many property
types and development scenarios.44
Though somewhat out of favor, REITs may be a credible
alternative for
as
the smaller investor.
high
employ
Federal Realty
may not be obtainable
REITs such
quality management
Direct
quality assets.
oversee high
Many
to
control, however,
due to frequent takeover defenses
written into the trust offerings.
(B) PRIVATE EQUITY
Private company equity owners are the second major
category of
involves
other
development companies
thinly
partnerships.
may be
developer investment.
that are
corporations
traded
Analysis and
peculiar to
This type
of equity
closely held,
and
limited
acquisition of each company
each firm.
The holder
of private
equity must either be ready to sell their interest or be
27
convinced to
price.
lure of a high
sell with the
The
real estate developers will
majority of entrepreneurial
fit into this category.
DEVELOPMENT COMPANIES
The first and most important subcategory of private
include
equity
development
or product
markets
that
companies
development
in
specialize
specific
with their
may part
types
Traditional
companies.
equity
holdings.
One exemplary
the Cadillac
Fairview portfolio, which was
the largest
about $2
billion for
"JMB paid
in Canada.
developer
Toronto developer
1988 for
JMB
Pacific
are
investors
development
the
limited
$398 million for a 20%
holdings."45 Conclusively, some of
respected
in
the California Public Employees
Fe
Sante
the
with their ownership of public
Retirement System last year paid
in
Ownership of
general partner
was
partnership under which
stake
they paid $920 million
of Hawaii.
Amfac Inc.
developers also fit well
companies.
JMB also
Cadillac Fairview in 1987.
purchased another developer when
in
Realty was
sale to JMB Institutional
companies
to
Corp's
estate
the largest and most
beginning
satisfy
real
to
their
look
toward
real
estate
demands.
INCOME PROPERTY HOLDINGS
Income property holdings are a second subcategory of
private
equity
equity.
and
Small
manage
corporations and
substantial quantities
28
families hold
of
private
may
Institutions
property.
income
their holdings after
who want to sell
property holders
income
approach
life changes or to raise capital. 4 6
by
Center
families
may hold
strategically
Rockefeller
other
Numerous
family.
Rockefeller
the
of
syndication
the
include
Examples
estate
valuable real
suitable for institutional acquisition.
DIRECT INVESTMENT
includes
equity investment
subcategory of private
The third
decide to create a
managers may
development company to
In this strategy
that is not being met.
fill a demand
Investment
institutional investment.
direct
the institution will not, however, be able to obtain the
strategic benefit
and cost savings associated
with the
purchase of an existing company.
viewpoint, the
times it is
existing
only real reason
one.
development
Some
people
funds
have
fund
that at
to develop is
to buy an
no
will have
Several large
pension funds.
work for
pension
foreign
pension
the
cheaper to build a building than
but to
choice
"From
commented,
analyst
An
done
already
this
successfully." 47
(C) HYBRID CORPORATE FINANCING
third major
The
includes
many
stock
category of
hybrid corporate
combinations of
and controlling
developer investments
financing.
Hybrids
convertible mortgages,
loan agreements.
29
include
preferred
Control of
a
developer may be gained through hybrid debt at favorable
terms
allow
also
may
financing
Corporate
for
future real
current and
the developer's
investment in
with their equity
a developer to part
unwillingness of
portfolio.
unsuitability or
from the
may arise
Hybrid structures
difficulties.
flow
cash
developer has
the
if
estate projects.
Developers with
financing.
relationship
funds
European
The
based
got most of
famous names
interested
were
and equity
financing
individual projects in individual markets.
become
the Japanese
When
sharing
in
for
The Japanese
in broad markets and product
wanted to secure companies
types.
the debt
a
stock holder
in
company, the developer had to enter into a long term non
little
financed developer then had
The hybrid
compete clause.
flexibility
to
with
deal
else
anyone
for
financing or new projects. 48
LOAN TO DEVELOPER SECURED BY PORTFOLIO EQUITY
An investor can gain access to a developer by
capitalizing the
security may
The
ability
negotiable.
be equity on existing
to
portfolio
access
The extent
loan.
an operating
company with
The
or future projects.
equity
of negotiability
may
be
would depend
upon the financial health of the developer.
Congress
tier
Group ventures
was an
entrepreneurial developer
financing.
organized as
a
example of
that secured
Subchapter S
medium
corporate
corporation,
they developed 5 million square feet of commercial space
30
wanted to
protect the asset
but still
raise cash.
future projects.
The owner
were financially sound.
England and
in New
base that he had
built up
on his
gave collateral only
He
He said, "If you have an earnings drop
I've
they come and take your buildings, just like that.
worked too hard to give away everything I have built up.
When they convert
They
bill.
the
or project tax shelter
no cash flow
gain and
a phantom tax
your property you have
by the
only secured
are
to cover
development
projects.49
TO DEVELOPER SECURED BY FUTURE CASH FLOWS
LOAN
used
to control
a
also be
secured amount
The
developer.
funds is
investment
flows could
future cash
secured by
Loans
loans
smaller than
significantly
of
secured by assets but could have higher returns.
A lender
pension
fund has
over
should be
Trading
developer's decisions rule.
property
for a
strategy in
managed
few extra
arise
points of
a development deal unless
or when
real say.
the pension fund has no
should be sold,
The
When disputes
the owner.
property
how the
that the
the property.
control of
lost
is legally
developer
only problem is
commented, "The
it
The
off control of the
return is
a poor
the fund totally
trusts its partner, an unlikely occurrence." 5 0
Yet, these loans could be successfully combined with
other financing vehicles.
developer $75
million in
paid for the 20% equity
For
example, "JMB loaned the
addition to the
stake.
31
$400 million
That loan could be paid
back in the form of an even greater equity interest.' 51
PREFERRED STOCK AND ADDITIONAL FINANCIAL STRUCTURES
prevalent in
real estate debt
subordinated debenture combined with
preferred stock or
equity warrants.
unlike
The investor would put
a project
financing, the
The money
developer's business and to take
capital, to expand the
obviously
This
opportunities.
other
increases liquidity,
not be
capital would
It would be used as working
would stay in the company.
of
up money and,
the developer's pocket.
taken out to go into
advantage
by
example, "a
For
anything.
be almost
offered
being
Eastman & Waltch.5 2 These
pension advisors like Aldrich
structures could
in the
and equity areas
options were
debt
Hybrid
future.
be more
financing vehicle may
type of
A corporate
point of
and from the developer's
view, institutionalizes the borrowing capacity." 5 2
can
company
The
registration/disclosure
public offering.
and
avoid
requirements associated
with a
remain
Further, it may not be a taxable event
is no tax on sale, which
for the developer, hence there
may
be
Finally,
important.
very
developer, such
private
a
as the Macomber Company 53,
to retain substantial control
respected
well
may be able
over the operation of its
business.54
In
a participating
significant
developer
tax
owns
mortgage the
benefits
the
property
construction write offs.
The
32
to
the
and can
fund passes
some
developer.
The
claim
all
the
developer can also deduct
the pension fund "lender." 5 5
the "mortgage payments" to
Instead of paying shares of
income to a part owner, the
project may make deductible interest payments. 5 6
The
flexible frame
work of
real estate development companies
both
investor and
vehicles
may
seller.
tailor
the
The
equity investments
may meet the needs of
array of
investment
investment
characteristics. 5 7
realized by
the equity investments.
find quality, long-term real
in
to
Advantages
structuring
particular
should
be
Institutions will
estate and developers will
find short term liquidity with long term profitability.
33
CHAPTER 4
THE ADVANTAGES OF EQUITY OWNERSHIP
Numerous economic and strategic benefits will be
gained
investments in
by institutional
vehicles.
equity-like
estate,
management
provide
will
Enhanced
portfolio
and
fiduciary
evaluation,
risk
diversification,
corporate real
increased real
returns
with
lowered systematic risk.
ADVANTAGES OF OWNERSHIP
e
DIVERSIFICATION
e
PREMIUM PROPERTIES
" SECURED STREAM OF PROJECTS
" RISK EVALUATION
" CONTROL
e
ACCESS TO INFORMATION
" ACCESS TO MANAGEMENT
e
QUALITY
" EFFICIENCY
DIVERSIFICATION
Investment managers may be concerned with the impact
of real estate's on their entire portfolio.
funds
gain enhanced
portfolio diversification
access to premium properties,
corporate
Retirement System
an
example
The
profits.
of
through
to future projects and to
California
purchase of Sante Fe
this
Real estate
portfolio
Public
Employees
Realty stock is
diversification.
The
investment fund stated, "Calpers was eager for the Sante
portfolio melded perfectly into the
Fe deal because its
specialize
their portfolios
regions where
niches and
market
managers
fund
companies that
for
search
weighted
under
Consequently,
California."58
efficiently
was
which
portfolio,
Calpers
in
can
in
are
weak.
In comparing real estate risk to the stock market, a
is easier to diversify away
portfolio manager said, "it
real estate than in
unsystematic risk in
This creates the potential
the S&P industry groupings.
for
portfolio." 5 9 Investment
should
developer
common stock
within the
through diversification
risk reduction
real estate
almost any of
to
contracyclicly
behave
also
real estate
in a
the
further diversification
market to provide
benefits. 6 0
PREMIUM PROPERTY ACCESS
Large real estate development companies who build for
their
account traditionally
in their
equity
mission
very
leveraged
fact, many
corporate
In
portfolios.
their intent
statements describe
best
own substantial
property
as
part
of
to quality."61
hold their
best performing assets
refinancing
appreciation
sense
term
intended to
for as long
as they
their
Traditional
developers.
for
arrangements
of
"long
their
sell off their marginal performers.
are in business and
makes
the
Many developers
commitment
This
to keep
permits
buildings
transaction.
35
to
owners
in
a
realize
nontaxable
as capital
hand,
other
the
On
markets become tight and
builders search for liquidity,
A pension
these sacrosanct assets may become available.
fund
to fulfill their real
finding it increasingly difficult
And with developers holding
estate allocations.
on to
of a
buying a piece
performing properties,
their best
are
funds
"Pension
this point,
echoed
advisor
estate
real
and
developer may be the only way to get the quality assets.
purchase
the
the developer's
be
will
investor
be able to
astute real investors will
At most, the
quality holdings.
able
At least,
hybrid
collateralize
to
investments with assets of the highest order.
SECURED STREAM OF PROJECTS
The
secure
institutional
investor
may also
access
to these
quality
future
Calpers fund stated, "One reason
developer
to
able
The
assets.
the fund invested in a
of prime
steady stream
needs a
is it
be
real
estate projects." 6 2
The pricing of the developer equity investment will,
in effect, contain a call option on the products created
during
the
next
fund's
portfolio.63
ownership of a
on
the future
secure
concurred
Advisors
developer may be seen as
product offerings." 6 4
projects
by
retail."65 Another
interesting aspects
managers
can
time at wholesale prices for
purchase projects ahead of
the
Fund
building cycle.
buying
at
"A call option
"Institutions may
wholesale
instead
advisor concurred, "One of
of this type of
36
that
of
the most
transaction is the
the developer's side of the deal.
ability to be more on
are in
the developer they
investor capitalizes
If the
This should
effect, participating on a wholesale basis.
realize the investor substantial economic benefits."66
If
managers would have
The
prices.
retail
exercised their option.
Otherwise,
the sale
presumably
interests,
to outside
project
the
investment
property,
the
corporation could profit from
the development
of
the
buys
fund
the
not have
option would
call
at
been
exercised by the investment managers but the development
profits
equity
the real estate fund
In either scenario
participation.
the fund's
through
captured
could be
captures the development profit of successful projects.
projects will
market.
An
be the ability
institution
to protect
from the
substantial
existing
with
type or market
against the deteriorated
well recognized
Indeed, a
those assets.
to hold product
in a certain product
portfolio presence
may wish
of future
sidelight to the securing
An interesting
sustaining advantage
in a fragmented
value of
strategy for
industry supports
the acquisition and closure of important competitors. 6 7
Both
the
product types
the
could be
investment
control of
controlled at the
Portfolio
manager.
could
deficiencies
be
prevention
and
promotion
mitigated
developments in process.
have satisfied
their need for
estate assets.
37
of
specific
direction of
diversification
through
the
active
Institutions will
a steady stream
of real
of California that builders will
England and many parts
will
Equity funding
high.
front carrying costs are too
The up
promising project.
of a
the strength
company on
start a
able to
not be
in New
so strong
has become
Government regulation
give them
the ability
to
complete difficult projects for the fund.
CALL OPTION CASH FLOWS
a
as
partially
valued
operating
earnings
of
option
call
the
also be
developer should
a healthy
Investments in
company.
yearly
on
the
An
established
builder's cash flows may be discounted at an appropriate
separately
existing
from the
Calpers recognized this value in their purchase
assets.
the pension
the deal,
"Through
Pacific.
Sante Fe
of
valued
rate and
growth
fund has gained access to earnings from some of the most
estate
real
significant
deals
development
in
California.ff68
RISK EVALUATION
An institutional purchase of a real estate developer
will not
increase individual, property
specific risks.
Moreover, retaining the management structure responsible
for,
and most
systematic risks.
lower
over the
general
real estate
be in
the
The
developer
systematic risk
control
will
the portfolio
knowledgeable of,
economy.
most advantages
should
will have
associated with
However, the
position to
no
the
developer
maintain
established relationships with local officials, property
managers and tenants." 6 9
38
The
lower.
is
directors
same as
the
not
assets." 7 0
But an
guaranteed
return,
is
guarantee
"This
secured
by
value of
a
with all
essentially be left
partner will
worth
only
the money to back it up.
something if the developer has
The moneyed
mortgages
discounted the
advisor
board of
seats on the
Stock with
guaranteed returns.
not
returns,
"Preferred
are
returns
not technically
risks are
cautioned that
Advisors
the risk since he is the only one with any real money in
the
The
deal.
as
end up
can
venture
the
jaunt by
moneyed partner into the development business." 7 1
of
Portfolios
participations'
can
illiquidity. 7 2 In the long
a
from
suffer
'equity
sponsored
diversely
high
degree
of
run, the control may provide
better real security.
CONTROL OF PORTFOLIO
one
of the
investor
may be
control over
ability
management of
timing questions
funds may be able
locational
substantial
estate portfolio.
market
beyond simple
look
of hold and sell
Investment
periods.
to design project size, architectural
characteristics
specifications.
Suboptimal
with
undesirable
buildings
institutional
to exercise
the real
managers should
Investment
and
the
to the
values
greatest
to
portfolio
exact
their
"fits"
may
characteristics
of
be
eliminated.
Again,
Calpers recognized
California Public
this opportunity.
Employees Retirement System
39
"The
plans to
estate company.,7 3 "It's a
the real
decisions made by
player in the strategic
be an active
unique investment.
We do really feel that as a minority partner, along with
the other
minority partners,
influence
that can
policy
the
of
made on
be
4
company."
deal of
a great
we have
strategy and
business
this
control,
of
Because
"Officials expect the investment returns from the fund's
Fe
Sante
in
stake
significantly more
Corp
Realty
Pacific
be
to
return they expect
than the 5% real
from the system's average real estate holdings." 7 5
ACCESS TO INFORMATION
A
access
to information.
access
to information
the
premium.
market
Managers will also
should
also
information
their
be
traditional advisors sporadic and
addition,
By
the source.
risk
uncertainty
gain access to proprietary
local
from
knowledge
gain
barrier between buyer and
may lower
buyer
from
directly
eliminating the communication
seller,
funds will
estate
Real
be
ownership will
equity
of
further advantage
localized information
The
local
valuable
than
insiders.
more
second hand data.
In
be timely
sources may
and exhaustive.
MARKET POWER OF DEVELOPERS
The best
developers may
consolidation
additional
of
market
long
"The
commented,
the
exhibit market
returns for their product.
power and realize better
analyst
be able to
term
trend
development industry
to
power
40
the
will
surviving
An
toward
give
large
builders and
many
real estate market with
The semi efficient
developers.
of space
lessors
more
will become
Competition will decrease due to increased
inefficient.
barriers and costs of
development.
Some developers may
corner the market in specialized niches." 7 6
MANAGEMENT
will gain the
Institutional investors
portfolio."f7
real estate
fund's
to top
"access
will buy
purchase
understands asset
management
that
relations,
lease negotiation,
and
equity
The
management for
the
Quality real
estate
management,
tenant
will
market timing
effect on terminal
strong positive
have a
industry.
the
in
professionals
estate
entrepreneurial real
experienced and talented
the most
advantage of
real estate
values.
Many private
developers who
would not
consulting
positions
employment or
salaried
consider
with
real estate
will
fund
an investment
or fund the few major
first investment funds to acquire
developers in
each region
quality human capital.
portfolio
The
become available.
scarce high
will secure the
Overlapping development company
acquisitions can
be
consolidated or
merged
under the best management talent of each.
Pension funds
valued good management.
manager commented, "When the amount
lose
through
stupid
deals and
property is measured against
a good
real estate
man, it
A portfolio
of money a fund can
mismanagement
of
its
the annual compensation of
appears paltry.
The plan
should measure the cost of the man against the amount of
and mot try to
can make for them
money he
cut-rate real
get by with
work for straight
estate people who will
salaries" 78
to the work they did the
work they put into real estate
They
new stock or bond manager.
last time they hired a
had to decide
the
should compare
"Pension officers
Furthermore,
and do asset
on a stock or bond strategy
They researched dozens of managers
allocation analyses.
After
and intensively interviewed half a dozen or more.
all, the pension officer is venturing into an investment
frontier for his fund and will want to work as carefully
as possible." 7 9
QUALITY
The advantages
through
realized
of owning
a developer will
only be
Real
estate
purchases.
quality
acquire healthy companies with
investors should look to
intelligent management. 8 0 Real estate fiduciaries should
not follow the
lead of "wall street buy
because
occurred
applicable
to
poor
of
may be
"Quality management
asset
managers
able to
should
properties
portfolio
specific
industry
per
is
not
se." 8 1
effectively modify
long term returns and values. 8 2
real estate to optimize
Astute
it
management,
estate
real
the
outs that have
continuously
modify
maintain
market
to
acceptance.
One
product
aspect of
real estate
obsolescence
risk is
and enhancement.
the notion
Although
of
many
of
real
assumptions
ignoring
these
enhancement
exist and
financial
value
of
models
the
If the
asset.
maintains
if there
However,
is
would be
deterioration, then its value
obsolescence or
its
its value in equilibrium
cost.
replacement
be its
and
residual
affect the
product
attractiveness over time, then
will
obsolescence
risks,
ultimately
make
transactions
estate
lower than its replacement cost, preventing the residual
value
Conversely, if
increases.
its
because
time
replacement cost
of inflation." 8 3
with
high
over
then
the
be
should
its
faster than
of quality
The purchase
management
quality
enhanced,
at a rate
would increase
that
inflation
product improves
the
value is
site
the
through
passing
fully
from
assets
most
profitable long term investment strategy.
EFFICIENCY
Another advantage of equity control may be increased
managers.
area
can
of
for
type
increase the
investment
fund
Furthermore, portfolios under weighted in one
efficiently
help pension funds
structure
Real
one
large
developer
estate advisors concurred,
estate management organization can
"A professional real
pursue varying investment strategies
the inefficient
management
research
market
portfolio acquisition.
in
property
and
development companies should
expertise in
efficiency
regional
Internal
efficiency.
should be
real
estate market.
able to
weed out
Professional
overvalued and
inappropriate investments for the pension fund." 8 4
CHAPTER 5
THE VALUE OF EQUITY OWNERSHIP
price of an operating
Establishing the
development
beyond traditional
in
discounted
cash
addition the
real estate
an
investment
of:
involves
company
consideration
analysis.
valuation
of
investment requires the
the premium
management, and
of
requires
the
assets.
the rights to future
In
further valuation
access to
control, the
for corporate
items
Importantly,
developer
established
flow
real estate
projects and cash
flow.
valuation does
Corporate acquisition
one, indisputable value.
Rather,
not determine
the process creates a
range of values within which successful negotiations can
take
place.
investment in
and then
Institutions
considering
a real estate developer
ascertain a maximum price.
VALUE OF DEVELOPER
ACQUISITION PREMIUM, % OVER PAR
O
MANAGEMENT
5
URE PROJECTS
41
CASH FLOW CHANGES
8
100 ......
AT PAR
.EQUIT.Y
equity
should evaluate,
aggregate the company's individual
CONTROL PREMIUM
23
an
aspects to
PORTFOLIO EQUITY
important and
The most
it's
equity
familiar with this process.
Institutional investors are
Analysis
be
should
building
traditional
Lease
acquisition.
of
that
than
different
no
value.
present
net
discounted
a
ascertain
of
flow may be capitalized
Each project's cash
portfolio.
to
a real
consists
worth
developer's
estate
definable aspect of
a
and
terms
quality, project location, and financial characteristics
and ultimate
to the capitalization rate
all contribute
asset value.
acquisitions
values can be greater in
They believe asset
you
also be more valuable
Portfolios may
A 1990,
U.S.
20% equity
holdings of
valuable
offering of
because of
portfolio to
Family's
was especially
market share
of
buildings in New York City. 8 5
may not,
development companies
large enough
the Reichman
it's substantial
modern, large floor plate
Most
city. 9 6
in large markets.
office space
class A
a group if
small enough
in a
market power
can gain
assets.
to equity
value
provide further
portfolio
believe
professionals
industry
Some
however, poses
provide additional
a
value to
their equity portfolio.
CONTROL PREMIUM
Beyond value of
can
be
placed
operations.
on
portfolio equity, significant value
control
of
a
company's
daily
Indeed, the holding period risk premium may
be reduced once
the 51% threshold of
45
voting rights has
The majority equity holder may influence
been achieved.
the direction of operations toward developments that are
real
institutional
the
for
beneficial
most
estate
portfolio.
To
equities markets for insight.
during
related to real estate,
models
levels
specifically
not
this effort developed financial
a going
value
to help
record
to
Although
1980's.
late
the
Public equity mergers and
accelerated
activity
acquisitions
the
look to
one can
control premium,
value a
and it's
concern
many
aspects for acquisition.
Milton
in
Rock,
explained
Handbook,
to control the
and more concerned with the
is perhaps less theoretical
valuation.
than discounted cash flow
an attempt to
technical
Rock explained, "Acquisition valuation
company's stock.
real world
between
the difference
the eventual price paid
asset value and
Acquisition
and
Mergers
The
estimate where a company
It is
will "trade" in
the market for corporate control." 8 6
highlighted the
Rock
He stated,
"The value
value of
of a company
controlling equity.
in the
market for
corporate control is higher (and often very much higher)
than its
value in
the secondary trading
Part of
the answer is
nothing
else,
found in the word
control of
assets
and
market.
Why?
"control." If
the ability
to
direct all of the free cash flow generated by the assets
are worth more to
a business manager than participation
in a small percentage of a business, without control, is
46
worth to the individual stockholder." 7 This control may
to different investors.
provide different opportunities
Some investors may wish to break apart the assets of the
Some investors may
firm.
others may
reduce
risky
of
out
the business
keeping
by
losses
their
Still
firms.
by combining
created
desire the strategic alliance
endeavors.
demand a high premium for
Real estate firms did not
Investors put little value
their control.
market presence and good
the
1980's
firms
real estate
few
were
will.
substantially
Average. 8 8 This
estate development
The control premium for
during the
acquired
below
is probably due
in a firm's
the
All
Industries
to the fact
is a disaggregated industry
dominant national firm.
PREMIUM OVER MARKET PRICE
U.S. MERGERS & ACQUSITIONS
50
. ..
40
4 0 ......
0
.............
.........
......
....
..........................................
1986
1988
1987
1989
Year
Real Estate
Banking &Finance
Publcly Traded. U.S. Stock Exchange
47
m All Industries
late
that real
with no
price/earnings ratio could
Furthermore, no constant
be
The
extrapolated from
declined dramatically
price/earnings ratio
that
during
Traditional investment strategy would
the late 1980's.
conclude
acquisition activity.
merger and
devalued future
investors
earnings by paying lower earnings multiples
real
89
estate
TAKEOVER P/E RATIO
U.S. MERGERS & ACQUSITIONS
to:1
25
.
............
1989
1988
1987
1986
Year
Real Estate
EEE
Banking & Finance
El
All Industries
Publicly Traded, U.S. Stock Exchange
measure
Another
multiples of
of
book value.
value
rule
may be
of
thumb
"Book value
Rock explained,
multiples also are used widely in the financial services
where they
industry,
for
net
liquidation
least)
value
are
carried
close to
market.
liabilities
intuitively
as surrogates
function partially
attractive
the
because
(theoretically
at values
The multiple
because
and
assets
of
of cash
the
at
flow,
potential
relationship to discounted cash flow valuation, also can
be very
useful."9 0 Again, the process
does not produce
one "correct" value but a range of defensible values.
The following average multiples for 1987 real estate
company
used as
rough guides
Multiple
of Earnings
Multi of
Net Worth
Percent
of Sales
41.8
2.49
149.2%
be
acquisitions may
of
value: 91
1987
The choice of the proper price/earnings multiple may
have
effect on
a large
the terminal
care
value, and
should be taken to choose a multiple consistent with the
company and the industry at
characteristics of both the
for
should use low P/E numbers
For example, one
that time.
stable margins
companies with
and relatively
low
growth rates. 9 2
The
premium
control
for real
minimum 23% and the industry
companies ranged between a
average
40%.
of
potential
and
companies by
development
estate
Investors
discounted
real
multiples for
acquisition
two thirds over other
earnings
the
estate
equity investments.
Institutional real estate investors therefor may be able
to
obtain
real
cash
estate
flows
relatively
at
attractive control premiums.
MANAGEMENT
High quality management was valued in all industries
and
was
especially
development field.
so
"It is
in
the
risky
real
estate
axiomatic in the real estate
property, that
owners make
the best
business,
on all
managers.
Anything that improves a property's cash flow
increases a property's value." 9 3 Quantifying this value,
however, may be difficult.
consulting firms
for strategic
planning, acquisitions,
Some estimates
accounting services.
legal, and
advisory
employ
readily
investors
Institutional
may be
extrapolated from the fees charged for these services by
and
management
management
property
These
services.
impacted the overall return
combined fees substantially
of real
asset
provided
advisors
addition,
In
consultants.
average fees
The industry
estate portfolios.
for direct investment include:
1.5% Appraised Value
ACQUISITION FEE
1-2% Appraised Value/Year
ASSET MANAGEMENT
PROPERTY MANAGEMENT 2-3% Gross Receipt per Year
Commingled real estate funds included these costs in
an additional management fee.
their returns and charged
One
pension
manager
investment
fund
commented,
"A
commingled fund will generally take a fee off the top of
the return which
around 1.2%,
fund.
in the
value
asset
but this
investment managers
The
figure is
somewhere
average is
to the
so particular
As more
be all that meaningful.
it may not
fund that
1.5% of the
ranges from about 0.9% to
enter the commingled
fund business
this fee will certainly drop, but it will have to remain
somewhat representative of true costs incurred." 9 4
rudimentary addition
A
fees
provides
be
management
portfolio value.
appraised
may
a
much
Appropriate
of the
higher
as
valuation
near
With leverage,
a
deductions should
50
standard management
percentage
be
taken for
5%
of
this value
of
equity.
functions
performed outside of the real estate development company
such as building maintenance.
management functions within an
Consolidation of the
fund
A large
additional fees.
company may save
acquired development
operation
house
in
"The
believed,
is
approximately one third cheaper than an outside advisor.
It
better." 9 5 After
is also
advisory
firms were
employee
at
a
million. 9 6
the
On average,
one
very expensive.
advisory
large
individuals
Talented
manages
company
15
million, generating fees of
properties valued near $500
$2.5
overhead allowances,
should
provide
services at a fraction
acquisition and asset management
of customary advisory fees.
value of
The
superior management
to determine,
difficult
and yet
reduced.
the most
beneficial.
the most
the business of real
Talented management may understand
estate investment
may be
to the point that
systematic risk is
Poor investments may be avoided and profitable
investments may
be enhanced.
entrepreneurial
real
developer
estate
beneficial when it allows
in an
Equity investment
may
be
most
this access to superior human
capital.
CALL OPTION ON PROJECTS
important aspect
Another
concerns
access
to
to
future
Institutions may secure development
stage,
for specialized
developments
have
been
value in
acquisition
development
rights, at an early
promising projects.
and
traditionally
51
assets.
sold
Many
before
a
on
completion
a
on
option
call
of a company
but not the obligation,
wholesale basis
property on a
and hold the
projects.
developments
future
Investors have the opportunity,
to acquire
However,
basis.
carry
want to consider control
institutions may
as
plus
cost
when complete.
A
options market
and a
value may
Black-Scholes
Option
Pricing
into an
estimated value
Model. 1 0 7
model to predict
found in
figure is
21.7%
7 years
8.0%
100
or disproven
The
to apply to
private market
with a base price of 100
The model may or may
purchase of quality real
not been
Black-Scholes Model values the
call option on future projects
45%.
publicly traded
This figure has
companies only.
real estate assets.
as high as
Historic
Model inputs may be estimated as: 97
The volatility
either proven
model
interest rates
Real Estate Company Stock Volatility
Development Period
Risk Free Rate
Base and Exercise Price
real estate
with the
The
option.
for a stock
may be used in the
real estate values
an option value.
be estimated
time, price, and
translates volatility,
securities
the
with
drawn
be
may
comparison
not apply to the
estate projects.
However, the
sizable value placed on future development rights by the
model should not be overlooked.
The
real
institutional
underestimating
estate
industry
investors
the
value
in
general,
in
particular,
of access
to
may
projects
and
be
at
wholesale prices.
to
At a
and place
trade
minimum, the industry has begun
on the
emphasis
great
value
of
development rights early in the building process.
CALL OPTION ON CASH FLOW
An extension
may wish
investors
Though discounted
cash
appropriate.
company.
the
flow streams,
operations of the
analysis could
cash flow
Investors
other related
and
from development
profits
Institutional
flow.
business.
also value
format may
option
capitalize
to
wish
who
flow or
operating cash
to capture
be to
notion may
call option
to future corporate cash
apply it
stable
of the
company could leave cash
be
the
flow in the
Otherwise, investors could use the cash to pay
dividends on their equity if desirable.
Using a time frame of
one year and similar rates as
option on future projects 9,
the call
the model values
the option at 8% of asset equity value.
The amount of equity investment necessary to acquire
and
development
fund
Developer's
companies
historically high
relatively small
vary
will
amount of equity will
be necessary to
expertise.
desired to
invest additional
money in a
retire the
debt associated
their portfolio
paid out to other lenders. 9 9
that a
leverage implies
and
acquire
widely.
A fund
that
portfolio may
with each property
that is
investment return will also vary.
The timing of the
management
contrast,
In
investment.
initial
the
7 years from
projects will expire 5 to
Call options of
expertise should begin to increase portfolio values soon
chart below depicts a typical
The
after the financing.
investment payback scenario.
DEVELOPER EQUITY
RETURN ON INVESTMENT
160
140-
120
1008060
40
20
0
0
2
1
3
5
4
6
7
8
9
10
11
12
13
14
15
YEAR OF RETURN
MPORTFOLIO ASSETS~
E~
Overall,
operating
MANAGEMENT
Euli
CALL ON CASH
and art
the science
real estate
such
as
control
CALL ON ASSETS
of valuation
for an
require thorough
developer will
analysis and strong judgement.
items
EJ
CONT ROL
The valuation of 'soft'
and management
value
may
be
anathema to real estate managers comfortable with simple
discounted cash flow analysis.
However, real value and
risk reduction may be found beyond the assets.
market investors
real
estate
Institutional
relied on
stock
real
this trend to
values
estate
during
managers
may
Equities
increase non
the
be
1980's.
able
to
capture this additional value through strong negotiation
and shrewd analysis.
CHAPTER 6
THE CANDIDATES FOR EQUITY OWNERSHIP
Successfully capturing value in a developer's equity
will require the evaluation
of real estate markets, the
development industries and the developers in them.
investigated in both regional
estate segments should be
markets and product
will
contain an
distinct
types.
array
reputation,
Real
of
Promising industry segments
development companies
quality,
and
financial
with
traits.
Differences in individual portfolio characteristics will
further distinguish
possible candidates by
and location.
REGIONAL DIVERSIFICATION
DECISION TREE
type, size,
INSTITUTIONAL PORTFOLIO NEEDS
Institutions
first analyze
should
their
internal
needs and goals to create a fully diversified portfolio.
for
Strategies
vehicles
regional
management
and
acquisition selections.
the
process
should
criteria
handled
be
estate
based
sustain the
diversified portfolio and to
Since successful
operating expenses.
that
belief
express their
route seems to
the
is
control
real
experienced
critical
most
investing
portfolio
private
the
element,
"Private
ideal route for pension fund
investors frequently
investment
directly.
have enough capital to create
real estate investors who
associated
influence
may
A pension fund manager believed
portfolio investing is the
an adequately
investment
diversification,
strategy for large
be the most sensible
pension funds in particular." 1 0 0
REGIONAL DIVERSIFICATION
Sophisticated real estate investors have divided the
understand
the
nature
of local
economy. 1 0 1
further
divided
works
North
These or
economic segments.
diversification strategies
eight
of the regional
to the underlying nature
Other
The
markets.
was an attempt to tie real
nations of the North America
estate trends
to best
segments in order
into numerous
United States
America
into
similar regional
should already be
in effect
in most institutional portfolios.
Investors should
management.
not plan
to move
the developer's
A successful regional developer strategized
56
point.
on this
skills of a
"The valuable relationship
regional developer are not transferable to other regions
developers strategy to operate in
and that the National
many markets will produce suboptimal returns."1
into
data
Of the
development presence.
markets are
major
active real estate
support an
SMSA's, 27
and health
to
development industry. 1 0 3
an investment
be balanced within
markets may
These 27
thousands of
appropriate size
of
look at
appropriate measure to
be the most
Areas) may
Statistical
Metropolitan
(Standard
SMSA's
Census
from U.S.
of regions
further breakdown
A
02
portfolio as a first step toward market diversification.
NUMBER OF INVESTMENT OPPORTUNITIES
Within
each
established,
market,
the 27
SMSA's,
becomes available.
range of
array, many
Of that
the
"top
of portfolio
reputable,
dominate
to 300
150
companies
builders will
management excellence,
in
100" developers
the
Although size is not
overlap regions and product types.
a measure
ten
this notion is extrapolated
When
a
to
companies will
development
real estate business.
to
five
most of
category should
any
be
considered possible acquisition targets.
A salient point lies in
developers represent
only 14%
companies.
development
the fact that these top 100
In
States
with
addition,
yearly
there were
there
1990
estate development and related
57
real
were 737
businesses in the United
revenues over
thousands
sizable existing
of the
of
$1
million. 1 0 4
firms with
In
lesser
earnings.
development community
As the
large development companies will
consolidates, various
dominate in each major
Investors should pursue these firms.
metropolitan area.
If the region is small enough, the major developers will
be
able
yields
increase their
to
competition
and
development
firms
power.
market
may be
The
powerful
through
most
influential
one
more than
in
These firms should capture
market in each product type.
of the region's development
the majority
decreased
potential and
investor's attention.
THE INDUSTRY
have
entry
different
segments
with
strategic
High
duplicate.
to
difficult
premiums
most promising
The
competition.
market
look
for
barriers
to
also
with
Each developer's industry and product type
competition.
may
types
development
and
industries
should
investors
Institutional
and
barriers
be in
companies will
that
advantages
permitting
to
are
costs,
grandfathered government permits, and development rights
for one
of a kind
projects may be items
that preclude
competition.
COMPETITION
critical
manager
should
Will
market
Analysis of corporate competitors is
theorized, "Competition
also be
a large
evaluated
on a
equity funding
with previously
One fund
equity investments.
for successful
from other
developers
portfolio wide
allow them
basis.
to enter
unbuildable product?
the
Will the
developer not
and sell
find financing
their portfolio
into the market?" 1 0 5
A developer continued, "Real estate development is
not
a business
will
not
Small developers
of fairness.
be able
to
compete
with the
of getting
in terms
a
least
from
time schedule in the
Every
relationships.
There is
up phases.
savings
cost
10-15%
more
through the
a project
permitting, construction and lease
at
larger,
Those relationships are
politically connected players.
invaluable
simply
strong
process can
be accelerated or at least managed effectively." 1 0 6
Investors will also have
top
instincts
of
the
acquire.
An
investor
structure of
developer
this
managed
certain
the
in
management
their investment.
with
that
ensure
to control the competitive
risk
with
provisions
exclusionist
company to compete with this
firm
they
the
"captivated" the
"They
developer would
the
not
create
that
another
one now that the developer
has recapitalized his existing activities." 1 0 7
development
For
analysis
should go
flow analysis
cash
company
far
investors,
competitive
beyond traditional
discounted
key to
profitable
and may
be the
developer acquisitions.
GOVERNMENT REGULATION
Investors should also look for developers who may be
stifled by
local government.
The
difficult regulatory
environments and the cost of land has increased start up
costs
for projects.
Permitting and
59
development times
ten
seven to
now take
projects
increased, some
have
years to implement. 1 0 8
In
example,
one
groups
meant it
could
can
your
develop
property.
stuck
developer
the
in
money adds
construction
waiting for city
of
of
his
on
independent
municipal
such
priced
high
years of
extra two
That
approval is more than
him into lethal cost overruns
an
Consider
midst
up.
of thousands
just to find out how you
expense
The
deliberations.
special interest
take hundreds
dollars and five years or more
Company
Insurance
regulations and
that city
complained
"Prudential
enough to drive
that kill the deal before
it has a chance at life." 1 0 9
Indeed,
funds
European
environments
investment
to
Britain, insurance companies
the
estate
real
government control
else
business
fullest.
"In
Great
and pension funds dominate
because
of development have
the business.
out of
the
regulated
pursued
have
of
years
tight
driven everyone
Institutions, particularly
pension funds, are the only ones with any money to lend,
and they do not lend, they buy property and hold onto it
forever."11 0 Investors
the U.S. should look to
Development
companies
who see this trend
beginning in
use it to their full advantage.
that
can
withstand
regulatory
pressures should ultimately create substantial value.
THE DEVELOPER
Upon
segments,
selection
of
desirable regions
and
markets
the investor must ascertain the best developer
60
in
each
to
advisor
fill
portfolio's
the
commented, "It
requirements.
easier for
seems inherently
local company to evaluate real
An
a
estate assets that it is
for a national or non local pension fund since the value
of these assets is so particular to the local market.
I
suspect that this would be true on any size project, but
especially
on
smaller
ones.""
Insurance companies pursuing
Pension
funds
and
this trend have gravitated
toward the "splashier names in the development industry.
These
names were
committees." 1 1 2 To
the
a
investor
to sell
easier
to their
mechanism
facto screening
de
has provided
famous name
date, the
investment
and
a
comfort level about general professionalism.
To
Management's
industry.
adverse market
has
a
clear
achieving
should
its
screen
should have:
systems;
in its
its
actual
record and
be assessed,
to manage
historical ability
conditions.
sense
Be assured
In
goals."113
numerous
other skills.
strong contractor
and
capable
is
of
institutions
addition,
knowledge of the city
during
that management
and
of direction
at
and standing
business plans should
performance against
with their
track
closely
"Look
company,
ability, reputation,
management's
along
a
screen
further
The
developer
and it's regulatory
tenant relations;
and
cultural and political sensitivity.
The aggregation and institutionalization of the real
estate development industry
developer
commented,
"I
will continue.
can't
see how
A respected
most
of
the
the future." 1 1 4
compete in
companies will
development
Undercapitalized development companies will be forced to
find
investment
an
Pressure will be
not dominate
may
partner
out
or go
spur movement
toward
three
business.
developers who do
put on medium sized
a specific market or
of
This
product niche.
development
tiers of
organizations. 1 1 5 The three tiers may include:
The National
Developer - Financed by
major pension
funds, they will operate in all markets through national
headquarters and act as a conduit for projects developed
for
the
fund's
umbrellas
advisory
These
portfolio.
could
provide
that
be
efficient
national
market
analysis and financial aid to regional offices.
The Regional Developer - Also financed by pension
funds and insurance
surface
will
impact local
power to
with the
developers
companies, Regional developers will
product
provide
different funds who
for
markets.
investment
want to invest in that
The
to
market on a
project specific basis.
The Boutique Developer - Financed by personal or
corporate
equity, Boutique
provide specialized product
sites under
developers
will emerge
to
types and infill commercial
20,000 S.F. that the
National and Regional
developers bypass.
of this group, the best equity purchases will be of
companies
that clearly
define
future development spectrum.
their
role within
the
CHAPTER 7
CONCLUSIONS
From the previous discussion,
one can draw a number
of conclusions:
-
The assets of pension funds continue to grow, and
institutional investors desire
profitable locations for
their real estate portfolio allocations.
-
The sources of real estate investment capital have
declined, and developers are
searching for liquidity to
finance their ongoing operations.
-
Equity ownership of real estate development
companies
is
a
workable
solution
for
institutional
investment and developer financing needs.
-
To accomplish their goals, pension funds, and other
large, patient
investors should
purchase the
stock or
hybrid debt of real estate development companies.
-
The equity control of development firms will provide
numerous
strategic
advantages,
significant
value
enhancement, and risk reduciton to investors.
-
The value of acquiring and controlling an operating
development
company is
significantly
higher than
the
discounted cash flow valuation of it's properties.
-
The strongest real estate development companies in
each market and in each product type are good candidates
for portfolio diversification through equity investment.
-
Institutions have substantial negotiation strength
over illiquid development companies.
Consequently, institutions should guard against
imposing
managers feel the
Long time real estate
they acquire.
firms
the development
on
undue restrictions
entrepreneurial spirit in real estate
"need to keep the
management is critical for the best results." 1 1 6 Yet the
for developer investment overtures.
environment is ripe
An
investment
experienced
predicted
manager
strong
negotiation leverage for institutional investors, 11
"Just about the only owners capable of holding
from the
good chunk of ownership
out a
predations of the institutional lender are
those developers who have such expertise in
developing a particular type of income property
that they are indispensable. Unless they put
the deal together, there will be no deal for an
investor to buy. In the end, these developers
have the best leverage of any developer or
individual owner. Because some developers are
more indispensable than others.
But as money becomes scarce, so do the
Income property financing is
clever deals.
less a negotiation between eguals than the
granting of a favor by those with money - the
institutions
-
to
without
those
it
-
the
property owners. Even indispensable developers
can become dispensable if they need cash badly
the
owners have
Unless present
enough.
resources to wait until institutions tire of
this position, the owner must give them what
they want. Where else can he go?
An
concurred,
advisor
opportunities
to
do
substantial benefits
Clearly,
development
this
"We
have
recently
for investors
company
a
lot
and
there
of
are
and developers."1 1 8
equity
institutional investment opportunity.
seen
provides
strong
NOTES
CHAPTER 1
1. Saint-Pierre, Paul S. "Real Estate - On The Threshold of
Industry Status." Journal of Financial Planning. April
1990.
CHAPTER 2
2. U.S. Federal Reserve 1989. Demand figures complied by
M. Louargand, Center for Real Estate Development, M.I.T.
3. Interview with Vincint Martin Jr., President, TCW Realty
Advisors, Center for Real Estate Development,
M.I.T.(May 1990).
4. Pension and Investment Age March 1990, p.6.
5. Zisler, Randall C. & Ross, Stephan A. "Stock and Bond
Market Volatility and Real Estate's Allocation." Real
Estate Research. Goldman Sachs. Nov. 16, 1987.p.16.
6. Russell-NCREIF & Salomon Brothers Study.
1989.
7. Martin, note 3 supra.
8. Interview with Dean Stratouly, President of Congress
(June 1990)
Group Ventures, Cambridge, Massachusettes.
9. Wong, Bechie Wai Yee. Eguity Real Estate As A Pension
Fund Investment. M.I.T. Thesis. Mgt., 1978,
10. Nessen, Robert. "A New Mood in Real Estate: Compromising
in a Time of Flux." Boston Business Journal.
May 21, 1990.
11. Ibid.
p.6.
12. Zisler & Ross, note 5 supra.
13. Sagalyn, Lynne B. "Real Estate Securities: Risk and
Return Over the Business Cycle." MIT Center for Real
Estate Development Working Paper FP#2. June 1989.
14. Ibid.
65
15. Wong. note 9 supra. 16. Interview with Joe O'Connor,
President, Copley Real Estate Advisors, Center for Real
Estate Development, M.I.T.(May 1990).
17. Shepherd, Colin P. An Introduction To Pension Fund
Portfolio Analysis: Is Real Estate Appropriate?
Unpublished M.I.T. Thesis. Mgt., 1982, M.S.
18. Interview with ir. Voas A.S.P. Brouns and Cordell
Lietz, Vice President, North America, ABP (Algemeen
Burgerlich Pensionfunds.) (June 1990).
19. McKelvy, Natalie A. Pension Fund Investments in Real
Estate. Quorum Books, 1983.
20. Wong. note 9 supra.
21. Brouns & Lietz, note 18 supra.
22. Martin, note 3 supra.
23. Shepherd, note 17 supra.
24. McKelvy, note 19 supra.
25. Pension Real Estate Assoiciation Conference,
Massachusettes Institute of Technology, June 1990.
Panel discussion.
26. Nessen, note 10 supra.
27. Kateley, Richard; "Emerging Trends in Real Estate:1990."
Equitable Real Estate, Investment Management. RERC Real
Estate Research Corporation, 1989.
28. Nessen, Robert. Real Estate Finance and Taxation.
Wiley & Sons. 1990.
John
29. Galbreath, Daniel M. "Will Other Developers Follow
Trump?" The Wall Street Journal. June 20, 1990. Dow
Jones & Company, Inc.
30. Ibid.
31. Interview with Arther Hallerin, President, First Winthrop
Investments, Center for Real Estate Development,
M.I.T.(July 1990).
32. Nessen, note 10 supra.
33. Interview with Mark Fowler, President, Americraft
Builders, Inc., Phoenix, AZ (June 1990).
34. Ibid.
35. Nessen, note 10 supra.
66
36. Brouns & Lietz, note 18 supra.
37. Nessen, note 10 supra.
38. Ibid.
39. JMB Institutional Realty "Will Other Developers Follow
Trump?" The Wall Street Journal. June 20, 1990. Dow
Jones & Company, Inc.
40. Ibid.
CHAPTER 3
41. Perini Investment Properties, Inc., American Stock
Exchange, AMEX Symbol (PNV). Managed by Perini
Corporation, AMEX Symbol (PCR).
42. Franz, Roger. Real Estate Investment Officer, California
Public Employees Retirement System (Calpers Pension Fund)
Commercial Property News. February 1, 1990.p.10.
43. Ramseyer, William. JMB Institutional Realty, Advisor to
Calpers Pension Fund Real Estate Assets, note 42 supra.
44. Sagalyn, note 13 supra.
45. Franz, note 42 supra.
46. Private holdings may be located through Property
Management and Trust Companies, Property Tax Records, and
Industrial, Commercial and Retail Industry Groups.
47. McKelvy, note 19 supra.
48. Stratouly, note 8 supra.
49. Ibid.
50. McKelvy, note 19 supra.
51. Franz, note 42 supra.
52. Azrack, Joeseph. Pricipal, Aldrich, Eastman & Waltch,
Published presentation, "Salomon Brothers Real Estate
Roundtable" Bond Market Research -Real Estate. Salomon
Brothers, Inc. 1988.
53. Interview with John D. Macomber, Vice President of
Strategic Planning, Macomber Company. (June1990).
54. Azrack, note 52 supra.
55. Macomber, note 53 supra.
67
56. McKelvy, note 19 supra.
57. Azrack, note 52 supra.
CHAPTER 4
58. Franz, note 42 supra.
59. Hartzell, Hekman, Miles, "Diversification Catagories in
Investment Real Estate." Bond Market Research-Real
Estate. Salomon Brothers, Inc. 1986.
60. Shepherd, note 17 supra.
61. Commercial Propert News ?
62. Franz, note 42 supra.
63. Interview with Mark Waltch, President, Artel.
May 1990.
64. Brouns & Lietz, note 18 supra.
65. Ibid.
66. Azrack, note 52 supra.
67. Porter, Michael E. Competitive Advantage: Creating and
Sustaining Superior Performance
New York: The Free Press, 1985.
68. McKelvy, note 19 supra.
69. Hartzell, note 59 supra.
70. Brouns & Lietz, note 18 supra.
71. McKelvy, note 19 supra.
72. Wong. note 9 supra.
73. McKelvy, note 19 supra.
74. Ibid.
75. Ibid.
76. Stratouly, note 8 supra.
77. Brouns & Lietz, note 18 supra.
78. McKelvy, note 19 supra.
79. Ibid.
68
80. Interview with Jeff Erhart, Esq., Managing Director,
Lincoln Savings and Loan, Phoenix, AZ.
81. Brouns & Lietz, note 18 supra.
82. Erhart, note 80 supra.
83. Hartzell, note 59 supra.
84. Wong. note 9 supra.
CHAPTER 5
85. Lazard Frerres Prospectus, 1990.
86. Rock, Milton L. The Mergers and Acquisitions Handbook.
McGraw-Hill Book Company, 1987.
87. Ibid.
88. Rose, Paul E., Editor Corporate Finance Sourcebook 1990.
National Register Publishing Company, Macmillan Directory
Division. 1990.
89. Ibid.
90. Rock, note 86 supra.
91. Ibid.
92. Ibid.
93. Sirmans, C.F. Real Estate Finance.
McGraw Hill Book Company, 1989.
94. Shepherd, note 17 supra.
95. McKelvy, note 19 supra.
96. Azrack, note 52 supra.
97. Sagalyn, note 13 supra.
98. Ibid.
99. Brouns & Lietz, note 18 supra.
CHAPTER 6
100. Wong. note 9 supra.
Second Edition.
101. Corgel & Gay. "Local Economic Base, Geographic
Diversification, and Risk Management of Mortgage
Portfolios." AREUEA Journal. Vol.15, No.3, 1987.
102. Stratouly, note 8 supra.
103. Martin, note 3 supra.
104. Gale, John. Wards Business Directory 1990.
4. Gale Research Inc. 1990.
105. Brouns & Lietz, note 18 supra.
106. Stratouly, note 8 supra.
107. Azrack, note 52 supra.
108. Brouns & Lietz, note 18 supra.
109. McKelvy, note 19 supra.
110. Ibid.
111. Shepherd, note 17 supra.
112. Stratouly, note 8 supra.
113. Rock, note 86 supra.
114. Stratouly, note 8 supra.
115. Ibid.
116. Wong, note 9 supra.
CHAPTER 7
117. McKelvy, note 19 supra.
118. Azrack, note 52 supra.
70
Vols.
3 &
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